Over concern that larger increases will have negative effects on employment, most minimum wage proposals call for only modest increases. A bill recently proposed by Rep. Scott Hamann, D-South Portland, would increase Maine’s minimum wage only $1, from $7.50 to $8.50, with subsequent increases indexed to inflation.
A better approach, recommended by the Center for Budget and Policy Priorities, would be to simultaneously raise the minimum wage and expand the state’s Earned Income Tax Credit, a program that supplements the wages of low- and moderate-income workers. Such a combined approach would more effectively help the working poor and spread the cost of helping more broadly, allaying concerns that larger minimum wage hikes would adversely affect a slowly recovering economy.
Raising the minimum wage, while expanding the EITC, magnifies the effect beyond what each policy does separately. Alone, a minimum wage hike raises the take-home pay of workers more, but since the EITC increases as income increases, in tandem the two policies raise the income of eligible workers even more.
Additionally, because each policy targets different types of workers, together they reach more working poor. Those most positively affected by an increased minimum wage are those working in part-time jobs and in service occupations — typically young and less educated workers. The EITC targets workers with children. Poor single mothers — among the poorest of the working poor — will especially benefit from the combined approach since they are more likely to be working in part-time jobs, often in service occupations and, as parents, have higher income limits under the EITC.
While on balance research indicates that the negative effects of a minimum wage increase on employment are relatively small, more modest and phased increases will give businesses — especially small businesses — a chance to adjust and absorb the increased wage bill.
While large businesses such as Wal-Mart — among those most often paying minimum wage — will be able to cover the increase out of thick profit margins for the most part, small businesses will need to cut production costs to offset the higher wage bill. Innovative business owners will do things such as conserve energy use, streamline production processes to cut waste, better train their workers to help them be more productive and offer non-wage incentives to encourage higher productivity.
Smaller increases in the minimum wage — enabled by a simultaneous expansion in the EITC — will make these adjustments more manageable, which in turn should help diminish any negative employment effects.
A combined approach also spreads the cost of helping the working poor more broadly across the private and public sectors. The burden of a minimum wage increase is borne by employers, stockholders and consumers and those workers who may see their hours cut or their chances of being hired reduced. The burden of an expanded EITC will depend on how the state makes up for the lost revenue.
Expanding the EITC increases the progressivity of the overall income and payroll tax system, but if the state offsets lost revenues by cutting spending or raising regressive sales taxes, the benefits to low- and moderate-income households will not be realized.
Since wealthy households and large businesses have on average seen their situation substantially improve over the last several decades, and most have weathered the recent economic downturn easily enough, it would be fairer to offset lost revenues with increased taxes on the wealthy and highly profitable businesses. Because the combined approach spreads the burden of helping the working poor more broadly, it should make a progressive approach more politically feasible.
Maine is one of 24 states that supplements the federal EITC with its own EITC. The federal EITC and most state EITCs are fully refundable, meaning when the credit exceeds the amount of taxes owed, the worker receives the difference as a refund. Maine’s EITC is only 5 percent of the federal EITC and is not refundable.
The EITCs in nearby Vermont, Massachusetts, Connecticut, Rhode Island and New York are more generous and all are either fully or partially refundable. Maine also has one of the lowest minimum wage rates in the region; only New Hampshire’s and New York’s are lower, at $7.25. Maine has room to both increase its minimum wage and expand its EITC program and still be in line with nearby states.
Median wages in real terms have been falling for decades. With more and more employers turning to contingent work arrangements in response to an increasingly competitive economy, involuntary part-time and temporary work are increasing. The gap between the wealthy and the rest is growing, and upward economic mobility is stalling. While not the whole reason, stagnating wages and increased use of contingent work arrangements are part of the reason.
A two-pronged approach to raise the minimum wage and expand the state’s EITC will more effectively and equitably rectify this economic imbalance.
Lisa A. Morris is an assistant professor at the University of Southern Maine’s Muskie School of Public Service, where she teaches economics and public policy and is the coordinator of the Policy Analysis Track. She is a member of the Maine chapter of the national Scholars Strategy Network, which brings together scholars across the country to address public challenges and their policy implications. Members’ columns appear in the BDN every other week.